Auto Sector: Stock prices though overheated will be a good buy on any corrections

Dynamic Equities | May 2, 2017, midnight

As the global economy is still recovering from a period of slow growth, commodity prices have been on lower side because crude oil prices have been trading in a range of USD 40-50 for the last 6 months. This led to lower raw material prices for the auto industry where crude oil plays a significant role. Also, the share price of tyre companies rose 6.35 per cent recently on anticipations of enhancement in margins following a steep slump in the rubber prices. A data consolidated by the Rubber Board showed that India’s natural rubber production soared 11 per cent in the month of July from a year ago to 52,000 tons.

Good rains:

India got twin benefits of a good monsoon after two years of drought. This led to a big pick up in the rural demand in the 2-wheeler & 3-wheeler segment.

New concept of taxis:

The concept of taxis like OLA, Uber,etc. have brought in a novel demand for the mid-pricing cars especially “Swift Dezire”.

Pay Commission recommendations:

The Pay Commission recommendations led to release of a lac crores by the Central government to the employees. This enormous outflow of cash has majorly benefitted the Auto Sector as the buying capacity of the people increases and they tend to purchase automobiles. This conclusion has been drawn from the past Pay Commissions.

GST – Goods and services Tax:

After the implementation of GST, the base rates are expected to lower, which in turn would boost the Auto sector as currently the excise duties on the cars are sky-high.

Hence, the markets are discounting these factors well in advance. Stocks like Maruti, Hero Honda, etc., have outperformed. The ancillaries of auto companies are also reaping the benefit and doing well. As the GDP of India grows over 7 per cent, the Auto Sector is the benchmark for GDP. The Auto Sector is expected to grow at least 10 per cent in the next 3 years. Also, the crude oil prices seem to maintain a status quo at 60 dollars per barrel for the next one year. This would aid the auto firms to keep input cost in check. Not to forget, new automobile models are to be launched soon which will further fuel growth in the sector in the years to come.

The Reserve Bank of India (RBI) is expected to cut interest rates in the coming months, either in October or December policy meet. This will lead to low interest cost for companies and pave a way for low EMIs for the consumers who buy on credit.


The Modi government's mission to turn India into an export hub for automobile, it is expected that the organized sector that holds a market share of 15 per cent, will see a better growth than the unorganized sector. Albeit, the market share of the organized sector is only 15 per cent, it accounts for about 85 per cent of the total industry turnover.

Beside this, government initiatives like ’Smart Cities', 'Skill India', 'Digital India’ are wheeling the auto sector at a faster rate. The future seems to be bright and sunny. The auto sector stock price though overheated will be a good buy on any corrections.

blog comments powered by Disqus